RBI directive will mean death of currency derivative trading by retail traders: Zerodha's Nithin Kamath

Zerodha's Nithin Kamath reiterated that the biggest risk for a brokerage is the regulatory risk.

The directive from Reserve Bank of India (RBI) on currency derivative trading will mean the death of that segment on bourses for retail traders, wrote Zerodha's Nithin Kamath on X platform (formerly Twitter) on April 3.

The co-founder of Zerodha was reacting to  RBI's January 5 circular about traders needing to have exposure to the underlying currency to trade in currency derivatives on the stock exchange..

Kamath posted, "I have said this before, regulatory risk is by far the biggest risk for stock brokers."

He added, "The RBI has its own reasons for restricting unhedged currency derivatives, but this means the death of currency derivative trading on stock exchanges by retail traders."

Also read: Bourses ask brokers to ensure compliance with RBI directive on currency derivatives' trading

The central bank has asked stock exchanges to inform users that they must be able to establish (if required) that they have an underying exposure to a currency--for example as an importer or exporter--before they can trade in the currency's derivative. Traders are allowed to take derivative positions up to $100 million on their own and must route positions higher than that through an authorised dealer/custodian. The directives in the circular will be effective from April 5.

I have said this before, regulatory risk is by far the biggest risk for stock brokers.

The RBI has its own reasons for restricting unhedged currency derivatives, but this means the death of currency derivative trading on stock exchanges by retail traders.

— Nithin Kamath (@Nithin0dha) April 3, 2024

The exchanges issued circulars to the brokers in this regard on April 1. The brokerages have since started informing the traders.

Zerodha has asked its traders to ensure to close their open positions by April 5 or be compliant with the central bank's directives.

Also, the brokerage has said effective April 4 traders can exit their current positions in the segment but will not be allowed to take fresh positions in currencies. And that, if they wish to take fresh positions, they need to submit the declaration form.

Also read: RBI consolidates norms of Currency Futures, Exchange Traded Currency Options in one direction

The declaration form, which is available on the broker's website requires the trader to declare that they wish to continue in this segment; to ensure that they maintain their position size within a limit of $100 million as specified by RBI; to agree to provide sufficient evidence of underlying request when asked; and to indemnify the brokerage from any liabilities, losses, damages or costs that may arise in the event the trader is unable to produce the necessary evidence.